US Cities Series: Minneapolis excels with public investment philosophy

US Cities Series: Minneapolis excels with public investment philosophy

Having avoided a race-to-the-bottom of tax breaks to lure businesses, Minneapolis-St. Paul’s long-term approach to public investments is key to its economic success.

For the coldest metropolitan area in the United States to also consistently be among its strongest and most diversified economies, Minneapolis-St. Paul must be doing something right. Boasting unemployment of 4.1%—without a natural resource boom—and the largest number of Fortune 500 company headquarters per capita of any US metropolitan area, the 3.2 million-person metropolitan area of Minneapolis and St. Paul certainly has an outsized impact in business.

There is no policy that is singlehandedly responsible, either. It certainly is not the combination of Midwestern work ethic and stubborn Scandinavian ancestry that public radio mainstay and area resident Garrison Keillor casts in his fictional tales of Minnesota.

Instead, the recipe for success for the city has been the result of a set of policies and relationships between public and private players. If there is one overarching theme to these policies, it is that investments in human and physical infrastructure, and economic development, are public goods—made with an eye for steady long-term improvement.

A story that goes beyond tax rates

One key to the Minneapolis (and Minnesota) success story is the insight that a low tax rate is not a prerequisite for economic competitiveness.

Instead, Minneapolis has consistently produced above average economic indicators, including high placement on a long list of employment-related measures for young people, by very deliberately using higher-than-average taxes to build the physical and human capital infrastructure that allows businesses to flourish.

The first area that has been built up through these investments is an educated workforce. Minneapolis-St. Paul ranks among the metro areas with highest proportion of college-educated workers.

To maintain its position in some of its most important industries, like medical technology and financial services, it needs to be. The skills pipeline begins with the area’s K-12 education, which ranks sixth in the country according to the Annie E. Casey Foundation.

The set of long-term incentives presented by the state’s approach to attracting business has been crucial in this regard. Instead of taking the path of many other cities and states of giving tax breaks, especially on property taxes, for companies to relocate or expand, the Department of Employment and Economic Development has taken a more novel approach: directly help finance business expansion.

This approach avoids the common pitfall of depriving governments, especially city governments, from future streams of tax revenue that has been shown to be a poor investment.

The Minnesota Investment Fund provides grants to Minnesota-based businesses that are expanding operations and hiring new workers. When these companies demonstrate that they are willing to make the investments, they are able to receive up to $1 million in financing from the state.

Since the last legislative appropriation for the fund in 2013, $14 million in state financing has accompanied $415 million in private financing.

Although the Twin Cities are nowhere near the hub for start-up companies that leaders would like, the state has committed another $15 million to the Angel Tax Credit, which incentivizes personal investment in technology start-ups.

While both of these programs are run by the state, the Twin Cities are the major beneficiaries since a majority of the state’s population lives there.

In a February article, The Atlantic heaps praise on another policy that has aided in the region’s development: tax-sharing between the cities and suburbs. While in other cities, like St. Louis in particular, the rush of middle class families to the suburbs in the second half of last century led to anemic tax bases, the Twin Cities adopted a property tax revenue redistribution plan between suburbs and cities.

Not only has this weakened the impact of suburbanization on Minneapolis and St. Paul proper, but it has lessened the incentive for a race-to-the-bottom of property tax credits for business relocation. While the policy has far from stopped the impact of suburbanization on racial and economic inequality, it has laid a groundwork for a healthier regional growth trajectory.

Next steps

The mantra that emerges from these, among other, policies is ‘grow from within’—there is definitely a sense that the Twin Cities are building a fortress on the prairie. But as the area realizes it has grown from just a city on the prairie to bustling metro, it has been slow to address other problems.

Most notable among these problems are academic and economic disparities between ethnic groups. Economic mobility for minorities in the Twin Cities is among the worst in the country. The gap begins early. While approximately two-thirds of Minnesota’s white students are proficient in math and reading, only one-third of black students are.

To make Minneapolis-St. Paul the full-blown miracle that it has been touted to be, these issues need to be addressed. Conveniently, some of the same infrastructure that has propelled the Twin Cities to where it is now can work yet again.

Leveraging tax-sharing plans and targeted aid to businesses with the same long-term, patient, and pragmatic approach will reap dividends for populations in the Twin Cities that have not yet benefited from the area’s successes.

The state’s Angel Tax Credit program for start-up companies earmarks half of its funds for investments in businesses owned by women or minorities. Further, the focus of city officials is quickly turning to erasing these disparities.

Mayor Betsy Hodges made racial disparities in economic, workplace, and educational attainment the centerpiece of her State of the City address and previous mayor R.T. Rybak joined Generation Next on his exit from office, an organization working to close the achievement gap.

As the Citizen’s League May the Workforce Be With Youpanel in the first week of April noted, Minneapolis-St. Paul has traditionally had a difficult time attracting new businesses and employees but excelled in retaining them once they arrive.

But certainly a major reason for the strength of retention and growth in area businesses is the long-sighted approach to public investments. Now, for the Twin Cities to remain in the upper echelon of US cities, it will have to apply those same processes to its own achievement gaps.

Categories: Economics, North America

About Author

Alex Christensen

Alex is an Editor at Global Risk Insights, who also currently works in investment research. His work on political risk and economic policy has appeared in many forums, including Business Insider, Seeking Alpha, & The Emerging Market Investors Association. He holds a Master’s in Economics from the London School of Economics and BA from Washington University in St. Louis.